VEBA and constructive receipt

[Guest tim zellmer]

It is my impression a VEBA cannot offer a choice between cash in exchange for unused vacation and retiree medical coverage without constructive receipt. Any comments?

[vebaguru]

vebaguru: Your impression is correct. Is it the employer or the VEBA that offers the choice? For example:

1. If the employer offers paid vacations and automatically converts unused vacations into a VEBA contribution, that might not become taxable.

2. If a defined contribution VEBA offers a choice of welfare benefits including a vacation benefit, the fact that the account is not used for a vacation and is still available for other benefits does not cause it to become taxable.

3. If an employer allows employees to choose between a paid vacation and a VEBA contribution, that would make the contribution taxable. It would also fall under the "use it or lose it" requirement under IRC section 125 as a choice between taxable and nontaxable benefits.

The question to answer in determining whether the benefit is subject to "use it or lose it" is: Does the employee have a choice between taxable and nontaxable benefits? If so it is an election under IRC section 125.

The question to answer in determining whether the benefit has been constructively received is: Does the employee have a vested current right to receive the benefit? If so it is taxable.

[KJohnson]

Vebaguru--In example No. 2 don't you run the risk of constructive receipt if the employee has the option of receiving the entire amount as vacation. I though the IRS looked at this in PLR 8644004. I know the whole vacation benefit area is a little murky because of Rev. Rul. 67-351 and 57-316 but this seems like an area that you have to be VERY careful.

[vebaguru]

Remember this is a choice of benefits within a VEBA trust, not of benefits provided by an employer. Vacation benefits are not generally funded through VEBAs (and the ones that are are collectively bargained), the mere fact that there is a finite amount of dollars available for benefits and using them for one purpose makes them unavailable for another (and vice versa).

[KJohnson]

I was thrown off by your statement "If a defined contribution VEBA offers a choice of welfare benefits including a vacation benefit..." and assumed that the vacation benefit was being run through the VEBA.